How Does a Cryptocurrency IRA work?

How Does a Cryptocurrency IRA work?

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An Introduction to IRA accounts

An individual retirement account (IRA) is one of the most popular ways to save for retirement giving you some of the best tax-saving benefits. Many savvy investors will begin contributing to an IRA as soon as they start working and earning income to complement their employee-sponsored 401k retirement account, or to plan early for their retirement when their employer does not have a 401k or other employer-sponsored plan.  You can also choose what to invest your IRA money in, from commonly held stocks, mutual funds, and other equities, to real estate, cryptocurrency, and other digital assets.

IRAs provide several advantages over a typical savings account, most notably tax savings and diversified investment options.  For example, depending on your income level, you can get up to 100% tax savings on contributions made to a Traditional IRA. A Roth IRA is funded with after-tax dollars and grows tax-free, while a SEP IRA, a Simplified Employee Pension, has its own advantages for those who are self-employed or own a business, one of which is higher annual contribution limits than a Traditional or Roth IRA account.

What is a Cryptocurrency IRA?

A Cryptocurrency IRA describes an IRA where the investment of choice is any digital currency, including Bitcoin.  In 2018, the IRS defined cryptocurrencies as “property” rather than securities. This change made it possible for institutions to start offering cryptocurrency as an investment in a Self-Directed IRA.

Cryptocurrency IRAs offer the option of a single cryptocurrency or a mix of carefully selected, eligible cryptocurrencies for a more diversified crypto portfolio. As with any IRA, your custodian must hold the assets.

Bitcoin is the most popular choice for a Cryptocurrency IRA, because it has been around the longest and proven to be the most widely accepted. However, over the years, other cryptocurrencies such as Ethereum and Litecoin have also proven to be stable and profitable. Many Cryptocurrency IRA custodians offer a narrow range of digital assets to choose from if you wish to diversify beyond just Bitcoin, avoiding the riskier altcoins.

The Difference Between a Conventional IRA and a Cryptocurrency IRA

Cryptocurrency IRAs must adhere to all the same IRS guidelines as conventional IRAs according to the type of IRA it is (Traditional, Roth, SEP). This includes transfer eligibility, contributions, distributions, and taxable events.  In addition, IRS code dictates that all IRA assets must be held by a trustee or custodian. A custodian is the financial institution that is responsible to not only safeguard your investments but also to report any contributions and distributions to the IRS. 

Because the IRS categorizes cryptocurrency as property and not a security, only a self-directed IRA that allows the account holder to invest in alternative assets can facilitate an investment in cryptocurrency. A Cryptocurrency IRA is simply a Self-Directed IRA that can invest in cryptocurrency. With a Self-Directed IRA, you, as the IRA account holder, choose how and when your IRA funds are invested – in this case, crypto rather than stocks, bonds, and mutual funds. However, not all Self-Directed IRA custodians have the capability of offering cryptocurrency as an alternative investment option, since they have very specific trading, tracking, and storage requirements.   

What Cryptocurrencies are eligible to be placed in IRAs?

The oldest and most popular cryptocurrency is Bitcoin, well known around the world for the incredible growth it has enjoyed over the past decade. Nowadays, there are over a thousand cryptocurrencies, but only a select few are eligible for IRA investment. Each custodian who offers cryptocurrency as an option determines which ones are eligible for their account holders. As Bitcoin gains institutional and individual acceptance, more and more investors are choosing Bitcoin and other cryptocurrencies as an IRA investment option. 

But is cryptocurrency safe?

Over the past decade, Bitcoin has become known for both its rapid growth and decline, prompting many to ask – is Bitcoin a good investment? Is it a stable investment? After all, we have seen cryptocurrencies move up or down in value by as much as ten or twenty percent in a day. These seemingly unpredictable and rapid swings make traditional investors wary and give the impression of an unstable investment.

Bitcoin’s volatility during these times increased its implied risk.  While its acceptance was still in question, analysts struggled to determine what were the driving forces behind these market gyrations. However, Bitcoin has shown consistent growth with a mean annual return of 408.8% over the past decade. 

Recently, however, Bitcoin has attracted the attention and acceptance of financial institutions like Microstrategy and tech giants like Tesla, both having invested billions of dollars into digital currency. These firms, along with many others, see Bitcoin as a hedge against inflation, similar to the way investors viewed gold during previous times of economic uncertainty. This type of large-scale corporate investment validates the legitimacy of Bitcoin and gives it more stability in the long run.

Get your own Cryptocurrency IRA today from Coin IRA

Coin IRA and its preferred custodians provide qualified Cryptocurrency IRAs helping thousands of customers enjoy the benefits of this new and exciting asset class.  Our highly-qualified consultants will help you choose from a range of options, including Bitcoin, Ethereum, and Litecoin with no maximum purchase limit.

Investing in cryptocurrency opens you up to a modern asset class that has out-performed every other asset in the past decade.  Furthermore, it allows you to maximize the diversification in your investment portfolio, mitigating risk and hedging other markets.     

Speak to a Coin IRA Cryptocurrency Specialist today about how you can better secure your retirement with a Cryptocurrency IRA. Our team will expertly and efficiently guide you through the process from start to finish.  It’s easier than you might think.